Coinbase was able to enjoy some breathing room after Ripple achieved a partial victory in court last week, but analysts warn it isn't out of the woods yet when it comes to its own battle with regulators.
In a recent report by Berenberg Capital Markets, analysts at the broker-dealer cautioned that Coinbase is still facing significant regulatory pressure that could derail its stock rally. Only a day after the ruling, Coinbase announced that it was suspending its staking service in four states — California, New Jersey, South Carolina, and Wisconsin — amid allegations that the service constituted a securities offering. The company said it disagreed with the notion, but initiated the freeze to let legal proceedings play out.
Staking is a process where users validate crypto transactions by pledging their own tokens to the process and receiving a financial return depending on how much they staked.
This suspension should "serve as a reminder to investors" that Coinbase is "far from being in the clear" when it comes to regulators despite the Ripple ruling, said the Berenberg analysts.
Last Thursday, federal judge Analisa Torres ruled that Ripple's sale of its XRP token was not a security offering, except in the case of sales to other institutions. The industry rallied at the news, and many immediately saw it as a boon to Coinbase.
Following the ruling, Coinbase’s share price rose 25%, riding sentiments that the outcome boosted its own case against the Securities and Exchange Commission, which filed a lawsuit against it on June 6.
In its own case against the SEC, the agency accuses Coinbase of operating an unregistered securities exchange, and for selling unregistered securities through its staking service called Coinbase Earn.
Coinbase has repeatedly argued that staking products are not being sold as securities offerings, but Berenberg warned that this service was "particularly vulnerable" to being deemed as such. The analysts themselves wrote that they believe Coinbase Earn is "effectively a securitized product", basing this view on outside legal assessments.
They also pointed to an admission by a lawyer for Coinbase at a pre-trial hearing last week in the case that there are “no losses” to those involved in staking, which would undercut the SEC's contention that the service put investors at risk of losses. However, the analysts note that Coinbase itself repeatedly acknowledged risks involved with staking that could lead to losses.
Coinbase did not immediately return Decrypt’s request for comment on this position.
Others were also unconvinced that the ruling was a major win for Coinbase. Jeffrey Blockinger, the chief legal counsel at the decentralized exchange Vertex Protocol, said that Torres' ruling did not address questions around whether XRP counted as debt or equity, something he considers unlikely, and warned that the SEC is unlikely to back down in its other open cases against exchanges.
"The SEC is not going to roll over," Blockinger told Decrypt. "I think the people saying Coinbase is in the clear because exchange trades are now not securities are being short sighted."